values less than that, then A is taken. Don't we just work under that proposition?

MR. DRAKE: Well, many argue that that is the basis.

MR. WALTER W. Law, JR., of New York: I wonder if Mr. Drake would care to give us any idea as to what actual ratios he uses under different circumstances in capitalizing income.

MR. DRAKE: We have established by statistics for all classes of corporations from listed stocks and also from returns of unlisted corporations, what we call discretionary rates, that is, with a range say from ten to fifteen per cent for a particular class.

The nature of the business, the nature of the assets and the regularity or irregularity of the earnings, together with other factors as mentioned in the paper, are of importance in determining the rate, but what I have tried to bring out in my remarks is that it doesn't require as high a rate to maintain sound asset value as it does to establish good-will or a value for intangibles. Another thing, a rate is a question of pyramiding. How far can you pyramid by capitalizing earnings? With a bank the first six per cent return unquestionably indicates one hundred per cent or par value. Possibly, eighteen per cent would indicate three times par, but I don't think you can go indefinitely on and for every six per cent say there is one hundred dollars of par value added; there are so many factors and conditions that must be individualized in the case of each corporation that it would be dangerous, from our viewpoint, to give out fixed rates, because in many cases they would not apply, and in many cases the taxpayer would come back and say: 'Here are your rates, why don't you use them?"

66

CAPTAIN W. P. WHITE: I have a little story about Massachusetts, in comparison with the federal method. I have held that my income tax rate for the corporation should represent a fair value of the machinery and material that is in the corporation; not the market value, but the fair value, because you cannot tell what the market value is going to be until we sell it. The fair value will give me a taxable value, and that is the essential thing. I have got to make money enough to pay taxes. If I make my fair value too low, I may escape somewhere, but then the income tax fellow will come along and snap me in for making too low a return. I feel that there can be a fair basis for the tax which the government charges at the beginning, for the license to do business, and that is the fair value of the capital invested-not the market value of the stock but the fair value of the capital invested. That is represented by various things; part of it may be good-will. Now, having established that and paid taxes on it this year, that should be a gauge as to the taxes that we should pay next year on our

income. The capital that is invested in business ought at least to pay four per cent, without any tax on income. After it has paid four per cent on the capital stated in its request to do business, if it shows an increase over that rate, in its distributed profit, then very properly it should pay an income tax, and that may be a fixed amount or a graduated amount, depending entirely upon which works out to the best advantage both to the business and the govThis much we must understand, that if business does not pay permanently, business will be driven out, and the government will lose a certain amount of income, the community will lose an opportunity for employment, and you will have destroyed something that is of value to the community.

ernment.

DR. ADAMS: I am very much interested in Mr. Drake's paper, because a year or so ago I recommended to the treasury department, and the treasury department recommended to Congress and the treasury department's recommendation was accepted, that the capital stock tax be abolished. I want to preface my remarks by this statement; I dislike personalities, but I want to say that Mr. Drake is the very highest type of public servant. If the income tax and the capital stock tax and federal taxes generally could be administered by men who are as genuinely studious and as genuinely disinterested and judicial in their temperaments and as finely inclined to make federal service a life career, as Mr. Drake, the answers to problems of federal taxation would have to be diametrically opposite to what they are, because I regard the matter of securing men of Mr. Drake's type, and more particularly in the federal service, of keeping them, the most important matter in the federal service-bar none. There is nothing too high that I can say of Mr. Drake's capacity in this connection. I say this much that my following remarks may not be misconstrued. Here is the question. I am facing gentlemen most of whom have had a great deal of experience in the valuation of corporations. You have all had to do with it; I have had to do with it. If you are conscien tious and if you appreciate the difficulties of your job, how much time ought you to give and how much care and thought and long study, to each one corporation before you can reasonably feel satisfied you are right? This question of valuation is one of the most difficult things in the world. In my opinion, it is not to be obtained satisfactorily immediately, but only after careful study, weighing all these many factors which Mr. Drake says must be determined. Now then, the federal government, with the force of one hundred and twenty-eight, as Mr. Drake has said, has got to assess and value each year from the City of Washington three hundred and forty thousand corporations. They are collecting eighty-five millions. By an addition of one and three-quarters per cent to the income tax, we could get an equivalent amount; by

simply raising the twelve and one-half rate to fourteen per cent. or, say, fourteen and one-quarter.

A VOICE: You would not get it this year, though.

DR. ADAMS: You would get it this year, because the information of shrinkage of income tax is very vastly exaggerated, sir. That is one of the things there has been a lot of exaggeration about. The collections this last year were three billions, two hundred and some odd millions of dollars. The income tax shrinks, but it by no means disappears, even in bad years. Now, what I am getting at is this:-I am asking a practical question, because if I continue to serve as I did once before, as economic adviser to the treasury, I shall be confronted with this question-Is it worth while keeping a tax which could be replaced by the simple addition of one and three-quarters per cent-two per cent at the most-to the income tax rate—a tax that requires the valuation of three hundred and forty thousand corporations each year? If all those one hundred and twenty-eight people were Drakes, could you even do it then That to my mind is a serious problem.

Then, one other question, assuming that you have got to keep it, why is it beyond our power to get for Mr. Drake the benefit of the help of the various state commissions and local assessors, who face this same problem throughout the country? Why couldn't the knowledge and information of both governments be brought together? In my opinion, the results and the details of these valuations, if we must continue to make them, made respectively by state officers and federal officers, ought to be pretty helpful, for mutual education, because the over-centralized condition of federal administration is one of its grave errors-I was going to say vices, but it is not exactly a vice, it is a misfortune. As I say, if we are going to continue these valuations, why can't we bring this mutual knowledge together? It is not an impracticable thing. At this particular point, I see no reason why there should not be great publicity, within reasonable bounds, of federal processes and results. I don't believe in full publicity of income tax returns, but I do believe that in this capital stock tax there should be publicity. and that there should be publicity of state results, and that there should be full and free interchange of information. I should like to know personally-I don't suppose I can get it--but I should like to know what a representative audience of men who work on valuations and taxpayers who must make valuations, feel about the possibility of a super-federal bureau, appraising with reasonable success three hundred and forty thousand corporations each year. And I also should really like to know, not in a critical spirit, what the real possibilities of joining federal and state knowledge together are.

JUDGE W. A. HOUGH of Indiana: Mr. Adams, I should like to ask you a question. Isn't it a fact that the returns that are made by corporations themselves of their invested capital are generally taken with practically no investigation at all by any department at Washington?

DR. ADAMS: Invested capital for excess profits tax?

JUDGE HOUGH: Yes.

DR. ADAMS: No, that is far from the truth.

JUDGE HOUGH: For capital stock tax?

DR. ADAMS: Mr. Drake can tell you all about that.

JUDGE HOUGH: You spoke about the enormous amount of work that would be done in arriving at the capital of these various companies. I have really been informed that practically nothing is done, and that that was one thing that is just taken as it is turned in.

DR. ADAMS: No, I think that is not true, and secondly, it would be very wrong if it were true, because the returns would be very unequal, and they ought to be worked over, in my opinion.

MR. DRAKE: Each return has an individual audit. The method of procedure is that a district is assigned to a group, and that district is distributed among eight men, with a group head, so that if you have a weak auditor in the group, he has only a small percentage of returns which are revised by the group head. Each return is individually audited, and I might explain how we are able to accomplish this work. The percentage runs that about two out of three are accepted as rendered; fifty per cent of the onethird require probably one letter to straighten out the difference; the other fifty per cent will consume the rest of the time in correspondence and interviews.

MR. J. L. SAYLER of Illinois: There is one situation about the valuation of corporations for the purpose of the capital stock tax that Dr. Adams referred to that I think might well be stated, and that is this, that generally speaking the corporations that make returns under this tax in a broad way might be divided into three classes, that is, the large corporations that would have a wide market for their securities, and then the second type, organized for profit, but which local people are interested in and have only a local market for their securities; then the third type, those rather closely held by a few people, who stand on a different footing, so far as the publication of what they are making or the valuation of their property is concerned, from the others, They would seriously object to having published in any way the records of their earnings or of their capital property. The threefold method of attacking

the problem of the capital stock tax, is, it seems to me, if we are to have a capital stock tax, the correct one, because there are ironed out in these three methods inequalities that might otherwise result.

One gentleman asked in what way the excess profits tax method of valuing property differed. In a broad way, under the old excess profits tax, the value of the property of the corporation was in the first place the actual amount of money that was invested in it, plus the accumulated profits and surplus, and plus, also, a certain amount of reserves that were held for contingencies. Now, the impropriety in using that basis for a capital stock tax is this, that you might, for instance, have a company that had formed a combination with others, and had had an opportunity of putting good will on their books, and had probably sold on that basis. That would be an entirely different thing from a company, for instance, that over a twenty-year period had formed no reorganization and had had no mergers, but which, on account of greater ability of its managers was earning a large income. Invested capital in the one case-in the case of the merger-would include the good will and items of that character, but the other company could not count good will in invested capital, for the purpose of the excess profits tax. On the question of capital stock under-estimated; if the capital is under-estimated on a mere balance sheet, that is ironed out in your net earnings. It would show there. Now I come to a third question, and that is this: In the case of valuation placed on the capital stock by the sales-by the market value of the stock-there again, in a company with a wide distribution of its stocks, it is very easy to ascertain a stock market quotation, either on the New York or Chicago or other exchanges throughout the country. When you come to the class of stocks not having a wide distribution but rather a large local distribution, the value may probably be based on actual sales which the company itself, in many cases, would be familiar with, and this would be checked by exhibit A, on the actual assets. But again, there is a type where there are no sales, and there the administrators of the law, either state or national, would have to fall back on the balance sheet statement and on the earnings, and not on sales. Therefore, if we are to have a capital stock tax, administered either by a state or by the national goevrnment, it will be necessary to use in a large measure the three different measures.

MR. G. W. MATHEWS of Massachusetts: There is one aspect of the capital stock tax law that I think ought to be ironed out. That is the duplication of the tax which occurs in the case of holding companies. There is clearly a bad case of duplication. The subsidiary is taxed for full value of its capital stock, and then the holding company, which carries that capital stock, is taxed again on. that same value which is reflected in the value of its own stock.